Even More Messing With the IRS

Last football season, I wrote a few times griping about the Redskin's quarterback situation. Because I am the fine person I am, I don't believe in criticizing without offering a solution. I am lobbying Dan Snyder to sign Jennifer Aniston as a free agent. Given the sorry state of the Redskins offensive line, Jen will make a better Redskins quarterback than either John Beck or Rex Grossman. She enjoys getting sacked. If you haven't seen Jen's latest movie, “Horrible Bosses”, I highly recommend seeing it. Her bra could win an Oscar for best supporting an actress.

Over the last year, I have become a home wrecker and destroyer of marriages. Men, keep your wives away from me. You might think it is because I am a dead ringer for Brad Pitt. He's richer, smarter, and better looking than I am. Damn, he is also a better actor. But outside of that, we could be twins. Venturing back to reality, I wreck marriages with tax returns.

In the middle of last tax season, a female business owner called me to get copies of her company's tax returns for the prior two years. I had to tell her that the last two years' returns had never been completed. A few years ago, her husband had quit his job to help her run her business. She had relied on him to coordinate the preparation of the tax returns. He had done precisely nothing.

Her business is a multi-level marketing business. These businesses, typically Amway or something similar, never make money. At least statistically they never make money. Her business makes a lot of money. It is unique. I have never seen anyone make money like this in multi-level marketing. Making money in multi-level marketing is about as likely as winning the lottery. Of course, I have some clients who have won lotteries. So it happens – just like people win once in a while in Las Vegas – just not very often. If people won very often, Las Vegas wouldn't exist. I was more surprised that she was making money in this business than I would have been if she told me she had won a $150 million lotto jackpot. The lotto odds are better.

Not only had her husband not arranged for the tax returns to be prepared, he hadn't even done the bookkeeping for the two years. I arranged for her to see a bookkeeper, who got the work done in less than a month. Then we prepared the business tax returns. As a result, she owed a lot of money. I mean a lot of money to the IRS – plus penalties and interest.

As you can imagine, she wondered exactly what her husband had been doing for the past two years if he wasn't doing anything on the administrative end of the business. He had nothing to do with sales. She did that. She was a little more than mildly peeved. Here's a hint for all the men reading this. If you are going to work for your wife's business, you should actually do some work. Sloth isn't sexy.

This whole situation caused enough tension in the marriage that they soon separated and are on the way to a divorce. Normally being the sexist I am, I would side with him. No chance here. As George Thorogood sang, “Get a haircut and get a real job.”

I broke up another marriage a couple weeks ago. Right after tax season, I prepared and presented a draft tax return to a married couple. They had some changes and comments. I revised the return and gave them an updated draft. Weeks went by with no word from them. If we prepare your tax returns, you know that our web-based client center sends automated e-mail reminders when we give you a tax return draft. Every five days, you get a reminder until you approve the draft, and we are able to finalize the returns. After a couple of months, I also begin sending out personal reminders just to get the process moving.

On a Monday, I sent a personal e-mail reminder to this couple. The following Wednesday, the husband called me. I expected the conversation to be about finalizing the draft tax returns. I was surprised that he wasn't calling about the draft. He called to ask some tax planning questions for the current year.

“Frank, I am hoping to avoid owing taxes the way we did for 2010. How can we change our exemptions to not owe money for this year?”

“Dan, the 2010 returns haven't been finalized.”

“Why not?”

“Because you haven't approved the draft I posted a couple months ago.”

“My wife was supposed to handle that. She handles all of the finances.”

Oops – I stepped into a steaming pile of poo with that conversation. He continued, telling me about how he no longer believed they were real partners in the marriage. He told me she was hiding things from him – financial things. I felt like I was in the opening scene of an Investigation Discovery episode. In the next scene, a dead body floats down the Potomac River into Georgetown to be found by a collegiate rowing crew. The only question is, “Whose body?”

Now you see how I have become a home wrecker. Here is some advice for married couples when it comes to family finances. First, leave me out of it. Second, marriage requires complete honesty in financial affairs. Third, leave me out of it. I ain't no Dr. Phil.

Ignore an Unhappy Customer

This week, I am lucky to have Rhonda Miller as a guest blogger.  Rhonda A. Miller is an attorney with over 15 years of experience specializing in Estate Planning, Asset Protection Planning and Business Planning.  Ms. Miller is the co-founder and Principal at Matsen & Miller, PLLC, and is licensed to practice law in Virginia, California and the District of Columbia.  You may contact her at rhonda@rhonda4law.com.  Rhonda and I have many shared clients.  Take it away Rhonda.....

You own a business.  What should you do if someone threatens to sue you?

If you are a business owner, chances are someday you are going to make someone unhappy.  It is just the law of averages.  It is what you do when that happens and how well you have protected yourself that will affect how much it hurts. 

A few months ago, I got a frantic phone call from my client.  Let’s call her Sue. Sue is a decorator, and she had just gotten a letter from an attorney representing Mary, one of her customers who was unhappy with the price she was paying to design her vacation home.  After the work was done, Mary decided she was being charged too much.  Sue had collected only half of her fee, but she had completed all of the work. 

Sue’s knee-jerk reaction was to call the lawyer who wrote the letter.  She just wanted to make this go away and she did not want to hire her own attorney.  After all, attorneys are expensive!  When speaking with Mary’s lawyer, Sue blurted out, “Fine, I will just refund all of the money.”  Mary’s lawyer responded, “Well that is a good starting point.”  Realizing she was in over her head, Sue hung up and called me.  Then I called the attorney.  The problem was the negotiation in his mind was starting at a full refund and only going up. I had to find something to counter his positions.  This is a situation that was made far more complicated because of a knee-jerk statement made by my client. 

 What should Sue have done?  She should have stayed calm, listened, said nothing, and then called me!

 If you have an unhappy client, do not promise anything.  If you hear from an attorney, do not communicate with him.  Instead, call your own attorney.   We all have a natural instinct to be sympathetic, but that sympathy can and will be held against you.  Anything you say or write is admissible to prove fault. 

Now, back to Sue and Mary.  In Sue’s case, I contacted the other lawyer and we were able to come to a mutually agreeable arrangement.   But what if that had not worked and Mary went ahead with a law suit?

Let’s take a look at a situation in which one of my other clients found himself.  I bring it up here because it’s a great example of how a business owner can be proactive in ensuring the protection of his or her personal assets in the event of any future lawsuits.  Let’s call this client Jim.  When Jim started his business, I helped him set his company up as a Limited Liability Company (LLC).  Many years later, he was sued by a disgruntled employee.  Not only did the employee sue Jim’s LLC, but she also brought suit against Jim himself, trying to get at his personal assets as well as the assets of his business.

Once the lawsuit started, our main focus was to get the personal claims against Jim dropped.  However, the attorney on the other side was very clever and immediately tried to “Pierce the Corporate Veil”.  What does that mean?  It means that the lawyer was trying to show that Jim and his corporation were one and the same. The first thing the lawyer did was ask to see all of the corporate books.  He wanted to review the Operating Agreement, yearly minutes and the financial records of the company.  He was looking for any indication that the company was not being run separately from the individual and was instead just a front being used to hide Jim’s own assets.

 For example, was Jim paying for personal items out of the business account?  Did Jim’s LLC have the required Operating Agreement and yearly company minutes?  By arguing to the court that the company and the person were one-and-the same, it would not have mattered if we got Jim personally dismissed from the lawsuit.  If the Court allowed the “Corporate Veil” to be pierced, all of Jim’s business assets and personal assets would be at risk for all of the claims in the lawsuit.

 Fortunately for Jim, we had been keeping his company books for years.  We also had worked closely with his accountant so everything was squared away. Although the attorney went fishing, he caught nothing.  Jim’s personal assets were safe.

 The take-away lessons from this post are many.  But most importantly I hope that you can see how critical it is that business owners be proactive and prepared.  And that having a good relationship with your lawyer and your accountant will go a long way towards your security and success.

Thanks Rhonda! Thanks for reading - as always, you can get great tax and accounting information at www.skcpas.com.  Frank

Sports and Business: "Refuse to Lose"

I am sports mad – I always have been. As a young man I played representative rugby at school and in the Army. I sat on bench for the County under-18s. My consolation at not making the starting fifteen is that the position was occupied by one Richard Hill who went on to captain England. I ran cross country for the County at schoolboy level. I played football for the Academy first eleven when I was at Sandhurst and I played Rugby, cricket and football for my regiment, I captained the regimental cross-country team and I was the regimental 800 metres champion. I only list this achievement to illustrate that I have a small insight into the psychology of the sportsman.

I discovered my passion for business in my late twenties at about the time my serious sporting days were beginning to wind down. I don’t think there was any connection between the decline of one and the rise of the other. However I do think there is a remarkable analogy between successful sportsmen and successful businessmen and this is something I want to explore in my blog over the coming weeks and months.

I have enjoyed this year’s Wimbledon as much as any of recent years. I especially enjoy watching Rafael Nadal play. I would love to know what goes on in his head when he is playing. Whatever it is, he has built a mindset that I describe as “Refuse to lose”. How often do we see him chase down shots that other players would give up on and concede the point? Often he still loses the point but sometimes he doesn’t – he rescues a point from a seemingly impossible position and turns a certain lost point to his favour. The key here is that unless he tries he won’t know whether he will win it and he is willing to try anything and everything.

This translates almost perfectly into the world of business and particularly into the world of sales. In my experience there are two types of salesman – there are those who give up on an opportunity as soon as it starts to get difficult. They only seem to want to work on low hanging fruit. And then there are the Rafael Nadal’s – people who keep fighting even when the odds seem stacked against them. Like Nadal they will lose plenty of these seemingly lost causes, but they will also win some and everyone they win is one more customer for the company that you would not have achieved from the low hanging fruit pickers.

As an example I remember a situation in my days at Transmit International, my first business start up. We had been through a formal tender process with the London offices of a leading Swiss investment bank. We were already an incumbent supplier to part of the bank and we knew they were very happy with what we did so felt we were well placed. So we were very surprised and a little confused to receive a letter out of the blue announcing that the bank had selected another company. Now many people would have accepted an official letter as the end of the matter – but we didn’t. We pulled some strings with our existing contacts and after a number of phone calls we managed to get an audience with the Managing Director of the division concerned. We met him and laid out our case that we felt we had been treated very unfairly and surely the low risk option was to use us as a known quantity rather than try someone completely untested. To cut a long story short, the decision was reversed and we were awarded the new contract. It was always a long shot, but on this occassion it worked.

So when things don’t seem to be going your way, remember Rafael Nadal sprinting to the far boundaries of Centre Court chasing down a ball that to most players would be dead. If you apply the same “Refuse to lose” mentality to your sales campaigns the worst that can happen is that you will be no worse off than if you hadn’t tried. But occasionally you will win business that you would otherwise have lost and in doing so you will also make yourself a very valuable asset to your sales team.

There is no place for unethical practice in business

Someone asked me recently in a profiling questionnaire if I thought there was any place for ethics in business. My answer was immediate and almost involuntary. I said that I thought that there was no place in business for unethical practice.

Nowhere is this being more graphically illustrated at the moment than in the case of Rebekah Brooks, the embattled Chief Executive of News International. Brooks was The Editor of the News of the World (NOTW) when a private investigator, allegedly working on its behalf, hacked into the mobile voicemail of Millie Dowler when she was missing and a full scale police search for her was underway. The discovery that voice mail on Millie’s mobile phone was being accessed gave the impression that she was still using her mobile phone. We now know the dreadful truth was that Millie was dead and the activity was a private investigator without scruples or morals working to find a story for the NOTW.

Brooks yesterday told News International staff it was "inconceivable" that she knew of or sanctioned the hacking of Milly's mobile phone. But this is not a defense – it is utterly irrelevant. I don’t think anyone is accusing her of personally organising this action. But as the Editor of the paper she can’t distance herself from it by pleading ignorance. That is as weak a position as it is possibe to take. She was in charge, she was responsible for setting the culture at the NOTW and I am afraid it stretches credibility that she didn’t know that this kind of behaviour was prevalent. If she didn’t know about it she should have done – she was the boss.  It may not have directly been her fault but it most certainly was her responsibility.

So it is time for Rebekah Brooks to show some moral courage and set an example to her staff. She has allowed her organisation to behave in the most despicably unethical way and she has no option but to resign. Her attempts to distance herself from the act beggar belief. She was in charge; there is no distance between her and the tactics of her staff. Every day she clings on to her job is another day when she is making the very clear statement that she condones unethical behaviour. Far better to hold her head high, stand up for stong ethical business practice, admit responsibility (if not fault), be accountable and resign than to be forced from office by a public campaign that shows no signs of relenting.

You Might Be a Business Loser If...

I am on a Loudoun County Chamber of Commerce committee that is sponsoring a lunch in July on succeeding in the Chamber. We have assembled a panel of four successful, at least in my opinion, businesspeople. A number of people suggested one particular person for the panel. I decided, under the exalted authority granted to me by the remainder of our committee, not to pursue this person. I don't consider him either a success or someone to be emulated. Yet, if you asked a hundred other Chamber members, eighty would disagree with me.

I have been actively involved in the Chamber for three years or so. Jack has been an active member since well before I came along. He is a Chamber membership ambassador, who has sponsored a lot of new members. He has been ambassador of the month many times and, if I remember correctly, ambassador of the year. Everyone considers him a great success in the Chamber. What could I possibly have against Jack?

I don't consider Jack a success. Over the three years that I have known him, he has worked for probably half a dozen different companies as a salesperson. I don't consider any of these companies places where I would work as a salesperson. I don't want to identify any of the companies by industry, but I don't think of these companies as someplace a salesperson could succeed. The dollar amount of each transaction is too small to support substantial commissions. Not surprisingly Jack hasn't succeeded in sales for any of these companies.

How can I hold that against him? First, he isn't a good enough business person to accurately identify real opportunities. Second, he hasn't been able to land a sales job for a serious company. IBM isn't competing for his skills. Jack is a success for the Chamber, but he isn't a success in the Chamber for his employers. Therefore, he isn't a success to me. He is just a guy with a lot of time to attend Chamber events. That isn't the message we want to or should want to covey in a presentation about succeeding in the Chamber.

A couple days ago, I ran into another Chamber pretender. She is a very attractive and well-packaged woman in her forties – I am guessing on her age. She isn't in my beloved Jen Aniston's class, but who is? At first glance, this woman reminds me a lot of my wife, Laura. She is very pretty and comes across as very intelligent. However, I had an almost immediate negative, visceral reaction to her as soon as I learned a little about her. Why?

She has or had a whole bunch of businesses, none of which have amounted to anything. Her current business is providing advice to businesses on using social media. Hey – that's a unique business these days – isn't it? It's a lot like being a real estate agent in Florida during the boom. I had a bell hop at a hotel pitch real estate to me during a vacation trip to Disney World.

What is this woman's experience in social media? Her level of experience is apparently about the same as mine. She knows what a hash tag is. Her other businesses have nothing to do with marketing as near as I can tell. She is just another person waiting to be buried in the graveyard of stupid business ideas. Why should that upset me?

She makes succeeding in the Chamber much more difficult for the real businesspeople in the Chamber. When a real business person attends a Chamber event and sees the number of people like her attending the event, he / she gets turned off. I hear this comment a lot, “How many business losers do I need to know in a lifetime?” Not everyone uses the word, loser, but they all mean that.

Business networking is a lot like dating on a number of levels. If you want to get beyond first base with either a date or a potential business prospect, you have to bring something to the relationship. If you don't have a real business, you bring nothing to potential business contacts. You don't deserve even a kiss on the cheek.

With all due respect to Jeff Foxworthy and in respect of any royalties I may owe him – you might be a business loser if:

1. You have owned three or more different and unrelated businesses in the last five years.
2. You have been employed by three or more companies in the last five years.
3. None of your businesses has ever achieved more than $30K in annual revenue.

Business losers are guilty of not sticking with anything long enough to succeed. The lady with the social media company won't succeed, but her failure will have little to do with her social media consulting skills. Obviously, I don't have any faith in her skills, but skills can be learned. She will fail, because at the first sign of difficulty, she will be off to another business idea. I have no clue what trendy home business idea will pop up next, but I know she will be there.

If you are interested in non-snarky business advice, check out the Stitely & Karstetter tax and accounting blog at www.skcpas.com. Thanks for reading!

Get Your Priorities Hijacked – Solving the Population Crisis

Let's start out with an unfortunate fact. Seven billion human beings is too many for the earth to support. We have to find a way to decrease the surplus population. You can call me Scrooge if you want, but I am prepared to offer a real suggestion to save our overloaded, under loved planet. I suggest decreasing our population by ridding ourselves of all the people, whose jobs waste other people's time. Let me give you an example of just such a person.

My wife's patience is being sorely tested by an oxygen waster at work. Laura is trying to submit an expense report to her company to be reimbursed for her travel costs using our fine Washington DC metro transit system. She is entitled to receive $120 monthly to defray the costs of using mass transit. Since she is a thorough, due diligence type of gal, she got on her employer's web site and read the instructions for submitting the claim for reimbursement. Her employer's policy requires the submission of either a log detailing the daily commuting expense or metro transit receipts. Laura elected to submit a daily log since the metro system doesn't print a receipt every time you take a trip from Vienna to Foggy Bottom for example.

Laura submitted her expense report, which was promptly rejected by the “expense report auditor”, who exists somewhere deep in the bowels of an office complex in Tennessee. There is something you should know about someone with the exalted title of “expense report auditor.” This person is no more a real auditor than my left big toe is the Pope. My right big toe is the king of England and my nipples are named Jack Ham and Jack Lambert, but those are stories for another time. The expense report auditor is really a lowly accounting clerk with a ridiculous title. Of course, giving someone an exaggerated title is always less expensive than paying a real salary. In the accounting world, this auditor is lower than whale dung on the bottom of the ocean.

Why was Laura's expense report rejected? Ms. Whale Dung decided that she could require receipts in addition to the daily log despite the company's policy of requiring one or the other. You might wonder if there is an IRS rule requiring the receipts and the auditor is just being a good steward of the company's fine reputation. Since I am a bit of an expert in this area, let me research this. I'll be back in a minute........ The answer is that the log is sufficient for the IRS.

Why is this battle of wills between Laura and Ms. Whale Dung important? Because this battle is costing Laura's employer a lot more money than just a $120 travel reimbursement. This battle has tied up hours of otherwise productive, and did I mention yet – billable time. Ms. Whale Dung isn't just wasting her own time. She is wasting Laura's time and the time of a number of other employees, whose jobs are to produce revenue for the company. These employees are all six figure salary types. Their time is just a bit more valuable than Ms. Whale Dung's time. This expense report will end up costing the company five grand or so. Five grand isn't a whole lot of money to a large company, but Ms. Whale Dung is probably a repeat offender. She is a time thief who costs the company money by wasting the time of revenue producers. That wouldn't be her description of her job, but most criminals deny their guilt.

I am not suggesting that the company save money by harpooning Ms. Whale Dung. Well, maybe I am. A more reasonable suggestion would be sterilizing her and any descendants. That would contain the genetic mutation that would make someone desire a job as an expense report auditor and help decrease the population thereby saving planet earth. Quick - somebody call Al Gore. He could make another movie.

If you are looking for real accounting and tax advice, check out the S&K blog at www.skcpas.com. Thanks for reading!

Hire a Consultant - Business Vampires

Let's start out with a hypothetical question – at least I hope it's hypothetical. If you were a vampire, would you feed on healthy or sick people? I would feed on healthy people to get better quality blood. Of course, I don't have much experience in this area other than watching “True Blood” on HBO.


Two months ago, I met a business vampire (consultant), who sucks the blood out of sick companies. He focuses on sick companies, because no healthy company would ever invite him in. And, we all know a vampire needs an invitation to enter.

I have (or had as it turns out) a client in the construction industry, who has been in financial trouble for the last year at least. His business has suffered from the recession as have almost all construction contractors. But his business has a fundamental problem most other construction contractors don't face. He has to order and pay for his materials six and sometimes nine months before he gets paid. He has a custom product that requires a month lead time to get from the manufacturer. Then,he has to hold the material until almost all the other contractors on the job are finished to install his product. If the other contractors are late getting done, he has to wait. If they get done on time, and he isn't ready, he faces financial penalties. His business is a really tough business.

Of course, he needed good bank financing, and I helped him find a bank that generously provided that financing. But over time, his revenue began to trend downward with the recession. He faced serious problems keeping his bank line of credit within terms while still paying vendors to get material for new jobs. Eventually, he was forced to violate the terms of his bank financing, and the bank wanted a plan to get back within terms. That plan would almost certainly involve a new capital source. In case you haven't noticed, not many investors are interested in financing construction businesses in trouble.

When the bank became insistent on cutting its exposure, Fred began a desperate search for anyone, who could potentially rescue the business. I introduced Fred to a reputable investment bank, who began a search for potential merger partners. The investment bank actually had a couple of prospects. However, in the middle of putting together the financial information for the potential merger partners, Fred was introduced to Greg. Greg told Fred that he had investors just waiting to invest in fine businesses like Fred's – even businesses in trouble. Fred would only have to give up a minority ownership interest, and he could operate the business as before. All Fred needed to do was hire Greg.

Fred scheduled a meeting with the bank. When I showed up for the meeting, Fred introduced me to Greg, who had brought along his trusted accountant, who looked like the crypt keeper. He was so old, I wasn't certain he would survive to the end of the meeting. After exchanging a few pleasantries with the crypt keeper, I determined that he knew absolutely nothing about the construction business.

Before the banker showed up, the four of us had a brief pre-meeting meeting to come up with a plan to present to the bank. Greg and the crypt keeper had absolutely nothing in mind to present to the bank. I offered a plan where the bank would provide additional capital for new jobs in exchange for receiving all of the profit from those jobs. That way, Fred could get the material for new contracts, and the bank would be able to gradually reduce its exposure as the line of credit was paid down. My plan wasn't perfect. There ain't no perfect in this situation. Fred would have very little money for overhead expenses, which meant he would have to make deep cuts. But he would live on to fight another day. Greg opined that my plan was near genius. The crypt keeper wheezed in agreement.

When the banker arrived, we presented my plan. The banker, who is a personal friend and someone whose business opinion I greatly respect, was non-committal. I had anticipated this. He agreed to take the proposal back to the bank's other executives. I had told Fred this was going to be a tough sell. At least, Fred was still in the game.

After we completed the discussion of my proposal, during which Greg and the crypt keeper thankfully kept quiet, Greg launched into his presentation. He stood at the head of the conference room sketching out his vision of the world on a flip chart. His first phrase to the banker was, “You know you can trust me.” When I hear someone lead with that, I know the world is about to come to an end. Of course, the banker had no clue who Greg was or what he was up to.

Greg continued on, spewing forth about the difference between venture capitalists and vulture capitalists and how you never want to deal with the vultures. Of course, none of this was remotely relevant. The banker just wanted a plan to get repaid. He just nodded politely throughout. I was mortified that our good proposal might be forgotten after Greg's presentation. Any college professor would have failed even a freshman business student for giving that presentation. There wasn't even a hint of substance or a plan to pay the bank except with some unnamed source of either equity or debt capital, who was ready to invest in two weeks. Mercifully, the meeting soon ended, and the banker left.

Greg, Fred, the crypt keeper, and I walked from the conference room to Fred's office. On the way, Greg told me how impressed he was with my plan. He told me he had a lot of important friends – like Lindsay Lohan's father. Greg told me he had vacationed with Lindsay's father in the Hamptons, and that he would soon introduce me to all of his important and rich friends.

When I got home that night, I told my wife, Laura, “We are damned.” Instead of “damned” I actually used a synonym for coital relations that begins with the letter “f”. I think I also added “doggie style” to the phrase.

The two weeks Greg had promised the banker soon passed. Now we are at two months with no sign of any money. Greg hired his wife, Mrs. Dracula, to suck out all the blood even faster. Then he fired all of Fred's office staff. Of course, there is no investor and no money. Greg is a vampire, who feeds on nearly dead business owners. He isn't even a competent vampire let alone a real consultant. The moral to this story is simple, never invite a vampire (consultant) in to run your business.

On a happier note, I now get the popularity of yoga. A couple of days ago, I was doing my normal stretching routine at Lifetime Fitness. My wife was scheduled to take a 3:30PM yoga class. As I finished stretching, I smelled a familiar acrid odor, that could have come from the psychedelic 1960's, wafting out of her slightly ajar classroom door. Now I get it. Yoga is a bunch of women who get high, lie down to nap, and call it exercise.

I have started a new exercise class for men. It involves drinking beer, watching sports, and belching. I call it beerobics. Last Friday, we held our first class at Buffalo Wild Wings. Mike Otto, Neil Richman, Jon Butt, and I worked out together. We were exhausted afterward. I needed a good ten hours sleep and four Tylenol to recover.

Thanks for reading. Check out our real S&K web site at www.skcpas.com. You'll find real advice there. I promise.